US ADP Employment Change July Preview: Jobs gains in service sector to slowdown

• US ADP Employment Change is expected to improve to 700K in July.
• Market reaction to ADP data is likely to be muted ahead of Friday's NFP report.
• A disappointing ADP print could lift EUR/USD toward mid-1.1900s.

The Automatic Data Processing (ADP) is expected to report on Wednesday that employment in the US private sector rose by 700,000 in July after increasing by 692,000 in June. 

Assessing June's report, "service providers, the hardest hit sector, continue to do the heavy lifting, with leisure and hospitality posting the strongest gain as businesses begin to reopen to full capacity across the country," said Nela Richardson, chief economist, ADP. Underlying details of the press release revealed that employment in the service sector rose by 624,000.

Earlier in the month, the preliminary Services PMI report published by the IHS Markit showed that the service sector was struggling to attract investors. "The rate of job creation was strong overall but softened amid challenges enticing workers back to employment," the publication read. On a positive note, the Employment Index of the ISM's Manufacturing PMI improved 52.9 from 49.9 in June.

Considering how the service sector employment made up the majority of job gains in June, an increase in manufacturing jobs might not be able to offset a decline in service sector jobs and cause the ADP Employment Change to post a lower-than-expected print.

Although the ADP data could trigger a market reaction, it is expected to remain short-lived ahead of Friday's Nonfarm Payrolls report. Since the beginning of the year, the ADP has not been able to provide a reliable insight into the labour market and investors are unlikely to use the ADP reading to price NFP expectations. Additionally, the ISM Services PMI for July will be featured in the US economic docket on Wednesday as well, possibly causing market participants to stay on the sidelines during the ADP release.

EUR/USD levels to watch for

In case a disappointing reading weighs on the USD, the EUR/USD pair could target 1.1950 (50-day SMA, Fibonacci 38.2% retracement of the downtrend that started late May) ahead of 1.1980 (100-day SMA) and 1.2015 (200-day SMA, Fibonacci 50% retracement).

On the flip side, a strong ADP print could cause EUR/USD to turn south, at least with the initial reaction. On the downside, 1.1820 (20-day SMA) aligns as the first technical support ahead of 1.1800 (psychological level) and 1.1760 (static level, the ending point of the downtrend).